Should exchange transactions be accounted for differently
than contributions? In December 2 01 4, the Consumer Association of America
(CAA), a not-for-pro?t research organization, received noti?cation of a $6
million grant from the Sporting Goods Manufacturers Association (SGMA) to
develop a football helmet that will provide better protection against head injuries.
The grant was intended to cover $4million of direct costs and $2 million of
indirect (overhead) costs. The grant contract stipulated that the SGMA would
make its payment to the CAA upon receiving invoices from CAA for the actual
direct costs incurred. It further required that the research results be
reported only to the SGMA and not be made publicly available. Each reimbursement
payment for direct costs incurred would also include an appropriate proportion
of indirect costs (i.e., an additional $0.50 for each $1 of direct costs). In
2015 the CAA carried out and completed the research for which it contracted.
Direct costs were, as estimated, $4 million. It submitted the necessary
invoices and received payment in full.
1. Prepare required journal entries for 2014 and 2015.
Be sure to indicate whether each entry should be made to an unrestricted or temporarily
restricted fund. You need not, however, record the indirect costs themselves
(in as much as, by their very nature, they are not tied directly to the grant).
2. Assume instead that in December 2014, the CAA
received a pledge of $6 million from the National Sports Association (NSA). The
donation is for research relating to football helmets. The NSA is a
not-for-pro?t agency, and the results of any research will be in the public domain.
In January 2015, the CAA received the contribution. Throughout the remainder of
2015, it carried out its football-related research (incurring $4 million of
direct costs). Prepare the required journal entries for 201 4 and 2015, and
indicate whether each entry should be made to an unrestricted or a temporarily
restricted fund.
3. Comment on any differences between the two awards
that might justify differences in revenue recognition.
4. Suppose instead that the NSA promised to make its
contribution only upon receiving a report that the research had actually been completed.
Would your approach be different? Explain.
12-8
Contributions of?xed assets may affect more than one
type of fund. Discovery Barn, a not-for-pro?t science center for children,
received a contribution of $3 0,000 explicitly designated for the acquisition
of computers. During the year, it acquired $21,000 of computers, which it
estimated would have a useful life of three years. It is the policy of the
organization to charge an entire year’s depreciation in the year of acquisition.
Prepare all required journal entries, being certain to indicate the type of
fund in which each entry would be made.
12-9
For purposes of external reporting, not-for-pro?ts
(unlike governments in their governmental fund statements) do not distinguish
between plant and other types of resources. In 201 3 , the Northwest Ballet
Association (NBA), a not-for-pro?t performing arts organization, undertook a
major capital campaign to fund a new theater, expected to cost $10 million. It
was quickly able to raise $6 million, all of which was donor-restricted. It
borrowed the balance, issuing a ?ve-year, 8%, term note for $4million. During
the year, the NBA broke ground on the project and incurred construction costs
of $3.4million. It earned $0.52 million in interest on temporary investments.
It incurred and paid $0.32 million in interest on the note. In addition, as
required by the note, it placed $0.7 million in a reserve fund (a specially
dedicated bank account) for the repayment of the debt.
1. To show how these transactions would be re?ected
on the NBA’s ?nancial statements, prepare a December 31, 2013, statement of ?nancial
position and statement of activities.
Assume that these were the only transactions in
which the organization engaged, and that all available cash, except that in the
reserve fund, had been invested in short-term marketable securities. Be sure to
properly classify all resources as either temporarily restricted or unrestricted.
2. Comment brie?y on whether the contributions from
donors and the proceeds from the bonds should be reported as restricted or
unrestricted.
3. Comment brie?y on whether the $0.7 million in the
reserve fund should be reported as restricted or as unrestricted.
12-10
Investment losses need not impair the principal of not-for-pro?ts’
endowment funds. In 2014, the Rubin Center for the Arts received a $2 million
endowment, the income of which was to be used to support local artists. The
center invested the proceeds in securities. In 2014, owing to interest,
dividends, and changes in market prices, the value of the endowment increased
by $120,000. Of this amount, the center spent $80,000 on programs that were
consistent with the endowment’s restrictions. In 2015, owing to a market
downturn, the portfolio incurred net losses of $60,000.
In 2016, it had net gains of $70,000. In neither 2015
nor 2016 did the center use any endowment resources to support its programs. In
the absence of donor speci?cations and applicable statutes, what would be the
balances, at the end of 2014, 2015, and 2016, in the center’s (1) permanently
restricted endowment fund and (2) related temporarily restricted fund? Also
indicate any impact on unrestricted funds.
12-11
Investment losses cannot be accounted for as the
mirror image of investment gains. On December 31, 2013, the Child Crisis Center
establishes an endowment fund with a $5 million gift of securities. Income from
the endowment is to be used exclusively to support a nutrition program.
Expendable income is de?ned in the indenture agreement so as to include all
investment gains, both realized and unrealized. Investment gains and losses are
to be accounted for as recommended by the FASB. During 201 4, the endowment
earns $1 00,000 in interest and dividends and spends the entire amount on the nutrition
program. The value of its securities portfolio increases by $500,000, from $5
million to $5.5 million. During 2015, the endowment again earns $100,000 in
interest and dividends and spends the entire amount on the nutrition program.
This year, however, the value of its securities portfolio decreases by
$800,000, from $5.5 million to $4.7 million. During 2016, the endowment
continues to earn and spend $100,000 in interest and dividends. This year the
portfolio recovers $400,000 of its investment losses and at year-end is worth
$5.1 million. At the start of 2014, the center had a cash balance of $600,000
in an unrestricted fund. Over the three-year period, this balance was
unaffected by transactions other than those just described.
1. Prepare a schedule for each of the three years (2014–2016)
in which you summarize the transactions as they affect permanently restricted,
temporarily restricted, and unrestricted net assets.
2. At the beginning of 2015, the year of the loss, the
total value of the security portfolio was $5.5 million. Ofthis amount, the
initial $5 million was classi?ed as permanently restricted, and the balance as
temporarily restricted. Assuming that you adhered to the FASB pronouncement,
how much of the loss did you assign to the permanently restricted assets, and
how much to the temporarily restricted assets? How can you justify this
division of the loss?
13-7
University loan funds can readily be accounted for within
the general framework applicable to not-for-pro?t organizations. Bronxville College,
a not-for-pro?t institution, maintains a loan fund of approximately $1 million
(including receivables). The funds are invested in stocks and bonds, and all
investment income must be added to the balance in the fund. The fund, however,
is unrestricted, in as much as it was established by the college itself, not by
donors. Prepare journal entries to record the following events and transactions
that took place during the year.
1. The college directed an additional $75,000 of donor
contributions to the loan fund.
2. The fund made new student loans of$200,000. It
estimated that approximately 10% would be uncollectible.
3. It earned interest and dividends of $6,000. In addition,
the market value of its investments increased by $3,000.
4. It collected $140,000 in loan repayments, plus an
additional $40,000 in interest.
5. It wrote off $20,000 of loans as uncollectible.
13-11
Is there a sound reason for accounting for
contributions to a not-for-pro?t university differently from those to a government
university? In January, 2013 Kirkland University receives a pledge of $200,000,
to be used exclusively tosupport
research in a specialized area of communication disorders. The university’s
?scal year ends on July 31. In December 2013 (the following ?scal year), Kirkland
receives the pledged contribution of $200,000 and spends $1 50,000 on
qualifying research.
1. Prepare all required journal entries to re?ect the
transactions described. Indicate the type of fund in which the entries should
be made.
a. Assume ?rst that Kirkland is a private not-for-pro?t
university.
b. Assume instead that Kirkland is a public university
and that it elects to report as a special-purpose government that is engaged in
only business-type activities.
2. On what grounds, if any, can you justify different
accounting principles for the same transaction depending on the type of institution
(public or private) or the assumption as to type of public institution?
